.Com Pricing Through 2018 Uncertain as USG Reviews Renewal Contract

VeriSign’s future ability to increase pricing for .Com domains has suddenly become uncertain after the company announced on October 25th that the renewal registry operations contract that has already been approved by ICANN’s Board of Directors is undergoing extended review by the U.S. Departments of Commerce and Justice.

VeriSign CEO Jim Bizdos told analysts:

“We have concluded that the Commerce Department may not complete its review and approve the renewal of the .com Registry Agreement prior to its expiration on Nov. 30, 2012, and that the Commerce Department, together with the Department of Justice, is reviewing the .com Registry Agreement’s pricing terms. Pursuant to the terms of the Cooperative Agreement, if the .com Registry Agreement is not approved by the Commerce Department prior to its expiration, the Commerce Department is required to agree to the extension of the .com Registry Agreement for six months, or such other reasonable period of time as the Commerce Department and VeriSign may mutually agree.”

Following a round of public comment, the contract under review was approved without change by ICANN’s Board at a June 23rd meeting held in Prague, Czech Republic. The announcement of U.S. Government (USG) review was unexpected given that the pricing terms are unchanged from the agreement forged as a litigation settlement between VeriSign and ICANN that received Bush Administration approval six years ago. The renewal agreement would run from December 1, 2012 through November 30, 2018 and allows up to four pricing increases of a maximum of seven percent each over the six year term without any need to explain or justify them.

While we don’t know for certain what has caused the extended review, to some extent VeriSign may be the victim of its own success at maximizing profits from the current contract. The company reported a profit of $77.9 million, or 47 cents a share, up from $58.9 million, or 36 cents, a year earlier, and its operating margin widened to 51.9% from 45.2%. On the negative side for VeriSign, the quarterly increase for .Com domain registration growth has been slowing (not unexpectedly, as the base of registered domains grows larger) and renewal rates have dropped slightly. VeriSign blamed the lower renewals on macroeconomic conditions, as well as changes in Google search practices that lowered the ranking of parked and low content domains in combination with the availability of free domains at some other registries.

Although the current contract received approval from the Departments of Commerce and Justice in 2006, that does not confer any antitrust immunity on VeriSign, as noted in its Cooperative Agreement with the USG which includes this language:

As to what material changes might be required to receive USG approval, we can only speculate at this time. But to the best of our belief, it is highly unlikely that the contract would be put out for competitive rebid, as this would open up the possibility of a non-U.S. company receiving the registry contract and could well send VeriSign hurtling toward bankruptcy as it has sold off other parts of its business over the past few years and is now focused almost exclusively on registry operations. Most likely are constraints on VeriSign’s pricing flexibility, which could range from reducing the 7 percent limit to something less, reducing the number of times that prices can be raised, or even requiring VeriSign to justify any future proposed increases to the DOJ before implementing them. As for the current base price of $7.85 on which future increases would be based, it seems less likely but not impossible that the USG would require a reduction.

And, regardless of what form its actions might take, it is our understanding that if the USG compels any material changes in the .Com contract ICANN would have to put it out for another round of public comment before the Board could approve it.

To the extent that the final determination on the contract may involve politics and lobbying, the announcement comes at an awkward time for VeriSign, as the long-time head of its Washington government affairs office unexpectedly resigned just a few weeks ago.